Alternatives - Real Estate Sales Comparison Approach

I’m using Schweser and looking at page 29.

When you are doing a comparable sales transaction…

The subject property is 5 years old. THe comparable transaction is 9 years old and had a sales price of $9 million.

The depreciation is 2% per annum.

My initial thought is that since the comparable transaction is older, you would subtract out, since older properties are worth less than new ones.

However, you aactually add back becuase its older. $9,000,000 * 2% * 4 years. = $720,000 is added to the value of the comparable transaction.

Can someone please explain their thought in this?


If you’re trying to value a 5-year-old asset by comparing it to a 9-year-old asset, you have to make the latter look as much like the former as possible: add back 4 years of depreciation to return the 9-year-old asset’s value to what it would have been when it was 5 years old.

Sir, you mean to say we’ve already deducted depreciation of 4 yrs on 9 yr old property and hence the same should be added back for comparison purpose ? Also, isn’t the deprication gets biased here bcoz here the assumption is that 4yrs back depreciation was same i.e 2% ?

That’s what I mean to say.

As for the bias, recall that depreciation is generally a guess; it may be biased, and it may not be, depending on how good a guesser you are.

ok thanks

You’re welcome.